It has been about a month since the last earnings report for Intel Corporation (INTC Quick QuoteINTC - Free Report) . Shares have lost about 3.1% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Intel Beats on Q1 Earnings, Raises FY17 Guidance

Intel reported first-quarter 2017 non-GAAP earnings of $0.66 per share, which surged 22.2% from the year-ago quarter but declined 16.5% sequentially. Earnings per share (EPS) beat the Zacks Consensus Estimate by $0.01.

The strong year-over-year EPS growth was driven by 7.2% increase in revenues, which totaled almost $14.80 billion but missed the Zacks Consensus Estimate of $14.81 billion. Revenues decreased 9.6% sequentially.

The robust year-over-year revenue growth came on the back of impressive results from the Client Computing, Data Center and Internet-of-Things groups, which contributed to almost 87.4% of total revenue.

Segment Revenue Details

Client Computing Group (53.9% of revenues) – Intel bundles PCs, notebooks, 2-in-1s, tablets and other computing devices under the Client segment, which actually helps comparison with the PC market numbers provided by IDC and Gartner.

Revenues increased 5.7% year over year but plunged 12.6% sequentially to almost $7.98 billion. The growth rate was encouraging as it continued to beat PC market trends. In fact, management still expects a mid-single digit percentage decline in the PC unit total addressable market (TAM).

On a year-over-year basis, platform volumes decreased 4%, while platform ASP was up 7%. Desktop platform volumes were down 7% and desktop platform ASP was up 2%. Notebook platform volumes were up 1% and notebook platform ASP was up 7%. Sequentially, platform volumes decreased 13%, while platform ASP increased 2%.

Data Center Group (28.6% of revenues) – Revenues increased 5.8% year over year but declined 9.3% sequentially to $4.23 billion. Platform volumes decreased 1%, while platform ASP was up 6% on a year-over-year basis. Sequentially, platform volumes decreased 7% and platform ASP fell 3%.

Per Intel, the cloud service provider revenues advanced 18%. Enterprise was down 3%, while non-CPU adjacencies grew more than 20% across all of the segments.

Management stated that it is on track to launch next-generation Skylake microprocessor, which is expected during mid-summer. The new processor is anticipated to deliver two-times improved performance in floating-point operations per clock over the current generation, which will support high performance computing (HPC) and artificial intelligence (AI) workloads.

Notably, the company recently formed Artificial Intelligence Product Group, which comprises all AI hardware and software assets along with AI engineering expertise.

We believe that growing demand for server chips that are used in the data centers from the cloud-based service providers like Amazon.com, Alphabet and Microsoft is a key catalyst for Intel.

Internet of Things Group (4.4% of revenues) – Revenues jumped 10.8% from the year-ago quarter but declined 0.7% quarter over quarter to $721 million. The growth was backed by strength in industrial, video and automotive applications.

During the quarter, Intel announced its plan to acquire Israel-based Mobileye, an autonomous vehicle technology provider, for a whopping $15.3 billion in an all-cash deal. The deal will help the company to fast penetrate the $70 billion autonomous driving systems, data and services market.

Non-Volatile memory solutions group (5.9% of revenues) – Revenues jumped 55.5% year over year and 6.1% sequentially to $866 million.

During the quarter, Intel shipped its first Optane SSDs for the data center. Management stated that Optane memory solution is now available online and will be launched in PC OEM systems later this quarter.

Programmable solutions group (2.9% of revenues) – The Altera business is now the Programmable Solutions Group, which increased 18.4% from the year-ago quarter and 1.2% sequentially to $425 million.

Intel Security Group (3.6% of revenues) – Revenues dipped 0.6% year over year and 2.9% sequentially to $534 million. In early April, the company completed the divestiture of its majority stake in Intel Security division to alternative asset fund manager TPG. The newly spun-off unit has been renamed McAfee, with TPG holding 51% stake. (Read More: Intel Trims Business, Sells Majority Stake in Security Unit)

Intel also has a residual segment, which includes results of operations from New Technology Group and other adjustments. The segment reported revenues of $42 million down 16% from the year-ago quarter and 35.4% on a sequential basis.

Operating Details

The gross margin for the quarter was 63.2%, which expanded 10 basis points (bps) sequentially and 40 bps year over year, better than guided 63%. The year-over-year expansion resulted from the absence of Altera acquisition-related charges, lower platform unit costs, and higher platform ASP. This was partially offset by higher factory start-up costs (primarily on 10 nm) and unfavorable product mix.

The sequential expansion in gross margin can be attributed to lower product warranty and IP charges.

Research & development (R&D) and marketing, general & administrative (MG&A) increased 1.1% year over year and remained almost flat sequentially to $5.43 billion, higher than management’s guided figure of $5.3 billion. As percentage of revenues, R&D and MG&A declined 220 bps on a year-over-year basis but increased 350 bps sequentially in the quarter.

The operating margin was 26.5%, down 340 bps sequentially but up 270 bps year over year. Segment wise, Client Computing group operating margin were 38% as compared with 25% in the year-ago quarter. The massive expansion came on the back of lower investments and declining costs (14 nm). However, on a sequential basis, Client Computing group operating margin contracted 60 bps.

Data Center group operating margin was 35.1%, as compared with 44.1% in the year-ago quarter and 40.3% in the previous quarter, primarily due to higher investments on product development.

Internet of Things group operating margin was 14.6% as compared with 18.9% in the year-ago quarter and 25.1% in the previous quarter.

Intel Security group operating margin expanded 200 bps on a year-over-year basis but declined 90 bps sequentially to 18.7%.

Non-Volatile memory solutions group reported loss of $129 million as compared with loss of $95 million in the year-ago quarter and $91 million in the previous quarter.

Balance Sheet

Cash, marketable securities and fixed income trading asset balance at quarter end was almost $17.30 billion, up $200 million from the previous quarter.

Intel has $20.65 billion in long-term debt now as well as $4.63 billion in short-term debt, which has led to a net debt balance of $8.18 billion.

During the reported quarter, Intel spend $2.0 billion on purchasing capital assets, paid dividends worth $1.2 billion and bought back shares worth $1.2 billion.

Intel’s board of directors approved an increase in its current share buyback program by $10 billion.

Guidance

Intel guided second-quarter 2017 revenues of around $14.4 billion (+/-$500 million), almost flat sequentially and up 6% year over year. Excluding Intel Security Group business, revenues are projected to grow 11% on a year-on-year basis.

The non-GAAP gross margin is expected to be around 63% (+/-2%), flat sequentially. R&D and MG&A expenses are anticipated to come in at around $5.2 billion.

Operating income is projected to be approximately $3.9 billion, while EPS is anticipated to be $0.68 (+/- 5), up 15% on a year-over-year basis.

For full-year 2017, management expects revenues of almost $60 billion, up $500 million from previous expectation of flat year-over-year revenue.

Gross margin is anticipated to be 63% (+/-2%), which remain unchanged from the previous expectation.

R&D and MG&A expenses are anticipated to come in at around $20.5 billion. Intel expects to reduce spending as a percentage of revenues by “2 points from 2015 to 2017”. Over the long term, the company targets operating expense of 30% of total revenue. Intel expects to reach this target not later than 2020.

Operating income is projected to be approximately $17.3 billion (up from $17.1 billion), while EPS is now anticipated to be $2.85 (+/- $0.05) up from previous guidance of $2.80 and an anticipated increase of 5% over 2016.

For the data center group, management expects operating margin to touch the lower end of its long-term guidance range of 40–45% in 2017. The company expects product costs to improve due to the transition from 22 to 14 nm, which is likely boost margins.

Moreover, Intel expects the memory segment to report profits by the end of 2018.

Full-year capex is now expected to be $12 billion (+/-$500 million) up $2.4 billion from 2016.

How have estimates been moving since then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

Intel Corporation Price and Consensus

 

Intel Corporation Price and Consensus | Intel Corporation Quote

VGM Scores

At this time, Intel's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with a 'D'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is suitable for value and growth investors.

Outlook

The stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.